Mid-tier firms have largely welcomed EC draft
proposals on audit while the Big four warned some of the proposals
could affect audit quality.
The draft proposals, widely leaked to the
media this week, recommend mandatory audit firm rotation, the
banning of non-audit services, joint audits, audit quality
certification, expanded audit reports and EU oversight reform.
Some of the draft proposals have been widely
welcomed, such as the abolition on restrictive lending clauses, an
EU audit passport and improved transparency in the tendering
process. Other proposals on mandatory re-tendering and the banning
of non-audit services are far less popular, while there is a split
between the Big Four and mid-tier on joint audits.
The proposal on non-audit services to audit
clients could threaten the future of the Big Four as multi-service
entities. It could force firms to drop audit clients or operate as
audit-only firms.
PwC UK head of regulatory policy Pauline
Wallace told the International Accounting Bulletin some of the more
radical proposals could endanger audit quality.
“You have to ensure you have confidence in the
market that a strong high quality audit can provide. Most of the
proposals in there at the moment will impair audit quality not
improve it,” Wallace said, while stressing the proposals are only
drafts and it is not time to panic.
Deloitte UK said any changes to the audit
market must not be detrimental to audit quality and should focus on
economic growth.
“In addition, we believe the costs of any
proposals for audited entities should not outweigh the benefits
derived from improved audit quality and auditor choice,” Deloitte
said.
While he welcomed the proposals, BDO
International chief executive Jeremy Newman expressed some concern
on his understanding of the details.
“I am concerned by the range and extent and
inter-relationship of some of the proposals,” Newman said.
“If I understand correctly what has been
presented to me, the logistics of having a nine year mandatory
rotation of firms, seven year rotation of partners, five year
tendering and doing it with joint auditors could become very
challenging.
“If you look at the combination of all those
things it may be going too far. I think it could just be too much
for corporates [to cope with].”
RSM International chief executive Jean
Stephens said the process still has some way to go but broadly she
is pleased with the overriding sentiment of the draft
proposals.
“We are pleasantly surprised at the ambitions
of the commission’s proposals that will go through discussion,” she
said.
“What remains after the discussion process is
going to be quite interesting. I think many ways the discussion has
evolved and hopefully some measures, such as the ban on Big Four
only clauses are going to stick.”
Crowe Horwath International has also backed
joint audits and periodic tendering but believes mandatory firm
rotation will affect audit quality.
It is too early to speculate on who will be
the winners and losers of Barnier’s vision, but a common view from
the profession is that any changes must not compromise audit
quality or further destabilise the economy.
